Certain Retirees Could Pay More Social Security Taxes Under New Bipartisan Proposal

Higher earners could soon find themselves paying Social Security taxes on every dollar of wages they earn if a new bipartisan proposal gains support in Congress.

The plan, outlined by Elizabeth Warren and Bernie Moreno, would eliminate the Social Security payroll tax cap as lawmakers search for ways to strengthen the program. Even if the proposal never becomes law, understanding how it works can help you make better sense of the debate and what it could mean for your retirement goals.

How the proposal would work

Today, Social Security's 12.4% payroll tax is split evenly between employees and employers, but it only applies to the first $184,500 of wages. Once someone earns more than that, they stop paying Social Security tax on the rest of their income.

The Warren-Moreno proposal would remove that ceiling, so every dollar of wages would be subject to the same 6.2% employee-side tax regardless of how much you earn.

For someone making $200,000, the annual increase would be about $961, which is 6.2% of the $15,500 above the current cap. And for someone making $500,000, the increase would be closer to $19,600. Self-employed workers, who pay both the employee and employer shares, would see roughly double those amounts.

How much revenue it would raise

When Congress last updated the payroll tax cap, it was meant to cover about 90% of all wages. Today, because high-income pay has grown much faster than average wages, only about 82% of wages are subject to Social Security payroll tax.

The amount of new revenue this proposal could generate depends on how it is written. The Congressional Budget Office (CBO) estimates that applying Social Security payroll taxes to earnings above $250,000 would reduce federal deficits by about $1.4 trillion over 10 years.

A broader version that removes the payroll tax cap entirely while still giving workers credit for those earnings could raise about $3.4 trillion over the same period.

Some estimates suggest changing the payroll tax cap could keep the Social Security trust fund going for several more years. How long the extension lasts depends on whether workers receive additional benefit credit for the earnings that become subject to the tax.

Who would pay more and who wouldn't

Most workers would not pay any more in Social Security taxes under this proposal. The additional tax would be paid almost entirely by higher earners because it applies only to wages above the current $184,500 cap.

The proposal would also have little immediate effect on most retirees. Social Security payroll taxes apply only to wages, not to monthly benefits, pension income, or IRA withdrawals. Retirees would generally pay more only if they are still working and earn more than $184,500 a year.

Would paying more mean collecting more?

Higher earners who pay more under this proposal would generally receive a larger Social Security benefit in return, but the increase would be much smaller than the extra taxes they paid over the course of their career.

That is because Social Security's benefit formula is designed to replace a larger share of income for lower earners than for higher earners. The proposal would keep that formula in place, so while additional earnings could still increase future benefits, they would not increase by the same amount as the extra payroll taxes.

That difference is one of the biggest points of debate. Supporters say higher earners should pay Social Security taxes on all of their wages, just like everyone else. Critics argue the proposal would weaken the connection between what someone pays into the system and what they eventually receive in benefits.

What this means if you're already retired or close to claiming

If you're already receiving Social Security or expect to claim within the next few years, this proposal would probably not change your monthly benefit. The payroll tax applies only to wages, so most retirees would not pay anything extra.

By bringing more money into Social Security, the proposal could also give Congress more time to work on a long-term solution and ease some of the pressure created by the projected late 2032 funding deadline.

While no single proposal guarantees what lawmakers will ultimately do, improving the program's finances could make automatic benefit cuts less likely if Congress reaches an agreement.

Bottom line

The Warren-Moreno proposal is one of the more promising ideas in the Social Security debate, and its bipartisan backing gives it more traction than most proposals at this stage. Whether it ultimately becomes law or not, it gives a helpful glimpse into the kinds of ideas lawmakers are taking seriously.

The debate is still in its early stages, giving lawmakers time to work through the details and giving you time to make the right moves as those details become clearer.

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Author Details

David Maina, CPA

David Maina, CPA, is a writer for FinanceBuzz with eight years of experience covering personal finance, with a focus on Social Security and retirement-related benefits. He helps readers understand how policy changes and personal decisions can impact their Social Security income, from avoiding common mistakes to navigating issues like benefit reductions and garnishments due to debt. He also breaks down complex topics like Medicare interactions and payment projections so readers can better plan for retirement.